The world indices are not looking good so far this week, the upside from the last two weeks of trading is fading slowly, at least that’s what it looks like halfway through the new week. We don’t know how it will end, if the current intra-week downaction is just another re-test of support, or if a continous move to the downside exceeding the mentioned support area will occur.
While some indices have really bounced off the support area with a clear divergent bar (also called pin bar, or Joe Ross calls it The Ross Hook), other indices weren’t successful in actually stopping out shorts, balancing some of the heavy down action.
The FTSE MIB, which is the Italian Market Index, also showed such a reversal bar, but was never able to actually establish a new high above it, instead it kept falling. Today the index reached a new low, now trading right on top of the support area. Since the divergent bar had already bounced off this price level, but was never exceeded to the upside, a new low as we’re seeing right now, indicates support might not hold and prices may get flushed further.
As the chart shows a fractal sell signal was triggered at 21575 (FTSE MIB current price: 17555), this position keeps accumulating profits. Stops had been tightened up on this market, but since it never went higher, the trendfollower just keeps enjoying what looks like some continous downside in this market.
The FTSE MIB is down more than 18% since 1/1/16. It saw its all-time high just before the burst of the dotcom bubble at 50108.56. Currently this market is down 65% since the year 2000. And with the current developments towards selling, it’s possible this market will soon see a trading level around 10000 points. It would then have lost 80% from its all-time high, i.e. in less than 20 years.
Now, imagine you were betting on that market with a buy and hold strategy hoping to take out some money for your retirement. Well, right now you would have lost more than half of your money, if you keep waiting, you might lose yet another 15%.
Nobody knows where, what we can call a bear market now, will end. It could go down a lot further, actually establishing a new all-time low around 10000. We’ll see.
Altogether, reversal bars as mentioned should not be taken for entry signals, but only for exiting rapid market action, especially on the short side. Since rallies can run really far while in a downtrend or bear market, it’s always important to keep accurate stops and secure one’s capital. A reversal bar as indicated may be a good point to lock in profits and get out of a market that starts acting crazy in the opposite direction.
It is still the job of the trend trader to get back in on any trend that seems to keep going, even if you have been stopped out before. That being said, all other world indices have triggered the reversal bar, i.e. they have traded higher than the high of the reversal bar, and therefore I currently don’t hold any positions in these markets – except for the FTSE MIB.
Will this week create new fractal sell signals on top of the support area, providing a new entry to profit from these down trends in all major world indices?
Who knows? We’ll see.
As a professional speculator we don’t need to worry about price movements, we only need to worry about how to deal with any sort of price action – what to do once price gets wherever it wants to go?